SEC, Senators Lean Toward Tighter Cryptocurrency Regulation

By David Jones
Feb 7, 2018 12:44 PM PT

Against the backdrop of a recent slide in bitcoin markets and a record drop in the U.S. financial markets, federal securities regulators and Senate Banking Committee members on Tuesday signaled that additional regulation may be necessary in the rapidly growing area of virtual currency.

Securities and Exchange Commission Chairman Jay Clayton said in testimony before the committee that virtual currency markets are initial coin offerings, or ICOs, that are trading globally, largely outside the scope of regulatory scrutiny.

While embracing innovation, the agency wants to ensure that Main Street cryptocurrency investors be provided the same level of protection that they would receive when trading standard securities.

"The cryptocurrency and ICO markets, while new, have grown rapidly, gained greater prominence in the public conscience and attracted significant capital from retail investors," Clayton told the committee.

There have been times in history when a rush to new investment vehicles has benefited the national economy as well as investors who bet on the right offering, he noted, "but when our laws are not followed, the risk to all investors are high and numerous, including risks caused by and related to poor, incorrect or nonexistent disclosure, volatility, manipulation, fraud and theft."

Clayton cited a recent study that showed 10 percent of proceeds from ICOs, or about US$400 million, have been lost to cyberattacks.

Wild West

Many cryptocurrency platforms are regulated by states under check cashing and money transmission services. However, Clayton and Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, last month warned that they too were keeping an eye on the virtual currency industry.

The SEC last month obtained a court order to block an alleged ICO scam by AriseBank, which promised to raise more than $600 million of a $1 billion goal in two months in what it promised was the world's first decentralized bank.

The court order froze the assets of the bank and appointed a receiver.

Giancarlo on Tuesday testified that regulators were considering a "do no harm" approach, comprised of improved consumer education and some increased regulation over data reporting, capital requirements, cybersecurity standards and measures to prevent fraud and manipulation.

Sen. Richard Shelby, R-Ala., a member of the Banking Committee, raised concerns that bitcoin lacks inherent value, and no one knows where the true floor is located.

Shelby fears bitcoin and other virtual currencies "could cause systemic risk to our whole financial system," he said in a Bloomberg television interview.

Free Falling

The testimony came against the backdrop of a precipitous slide in bitcoin prices, which had fallen below $6,000 for the first time since mid-November, and were off nearly 70 percent from all-time highs recorded in December.

"Volatility is more digestible if the general direction is up," observed Jessica Groopman, industry analyst at
Kaleido Insights.

Bitcoin's dramatic volatility, coupled with the uncertaintly of traditional financial markets, could precipitate a flurry of demands from central banks and governments, she told the E-Commerce Times.

There have been recent moves to crack down on virtual currency trading, Groopman noted, including plans for a joint effort to regulate the activity at the upcoming G20 summit, and an announcement last month that Facebook would ban cryptocurrency ads.

Even before Tuesday's hearing there were concerns about bitcoin trading and ICOs from federal agencies, said Gabriel Wang, an analyst at Aite Group.

China and other countries recently have moved to crack down on cryptocurrencies, he told the E-Commerce Times.

"Given what's happened most recently, I think it will be a surprise if we don't have more regulation in terms of who can set up bitcoin exchanges," Wang said.

Economist Nouriel Roubini has ripped the virtual currency market in recent days, calling them crypto-terrorists in a series of tweets and warning that the market would crash to zero.

Bitcoin is "a combination of a bubble, a Ponzi scheme and an environmental disaster," said Agustin Carstens, the new general manager of the Bank for International Settlements, in a speech in Frankfurt earlier on Tuesday.

However, investors were pleased by what they saw as a relatively light touch approach to regulation compared to the heightened fears of a crackdown, according to Ronnie Moes, founder of
Standpoint Research.

The bad behavior of players at the lower end of the market is not going to get in the way of the more established leaders in the industry, he told the E-Commerce Times.

"I think the market has been overreacting to the headlines," Moes said. "Everything that happens with these penny names at the bottom of the barrel, and these ICOs -- I don't care about that."

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.